Early 2000s "China Shock"
"In the course of 30 years, China emerged from relative economic insignificance to become, in 2005, the world's third largest trading nation after the United States and Germany, and in 2012, the largest" (Wang 2013, 12).
Before China became the great economic power it is today, it went through many decades of struggle and reform.
Beginning with the collectivization of agriculture (1950-1953), the Great Leap Forward (1958-1961), and the Cultural Revolution (1966-1976), China began to "fall further behind the rest of the world economically" (Autor, Dorn, and Hanson 209). Following Mao Zedong's death, Deng Xiaoping rose in Chinese politics and spearheaded a series of economic reforms in hopes of modernizing China. Because China was incredibly isolated during Mao's rule, there were "abundant opportunities for later catch up" (Autor, Dorn, and Hanson 2016, 209).
China's economic future was not promising in the late 1980s. It was plagued with rising inflation and political turmoil (the Tiananmen Square protests in 1989), which caused reform to stall and international doubt about China's ability to improve its market. Surprisingly, China turned its economy around in the early 1990s, which was the beginning of "dizzying export growth" (Autor, Dorn, and Hanson 2016, 209).
Deng's reforms which transformed China included "the decollectivization of agriculture, the closing of inefficient state-owned enterprises, and the migration of 250 million works from farms to cities" Autor, Dorn, and Hanson 2016, 211). These changes in the 1990s contributed to China's entry to the WTO in 2001 because they were required to privatize most of their industries in order to gain membership.
The global landscape was greatly reshaped due to China's quick and drastic economic growth. This time also saw China lifting "hundreds of millions of individuals out of poverty. The resulting positive impacts on the material well-being of Chinese citizens are abundantly evident" (Autor, Dorn, and Hanson 2016, 234).
Referencing the graph below, it is clear that as China's economy took off, so did the trade deficit. With China exporting more and more goods to increase its wealth, the U.S. imported more and more Chinese goods. China's entry to the WTO created favorable trade conditions for the Chinese-American trade relationship, facilitating the growth of the deficit.
Reforming after the Tiananmen Square protests
The negotiations for WTO entry were halted in the wake of the violence at Tiananmen Square and resumed about two years later.
In addition, the U.S. took direct action against China in response to the violence incurred by the government. President Bush suspended all "government-to-government sales and commercial exports of weapons, and suspension of bilateral visits between military leaders" (Wang 2013, 6).
After the setback of a couple of years, Deng and other senior Chinese officials revitalized the push towards a market-oriented economy. This culminated in accession to the WTO.
